Changes to VAT compliance rules

Changes to VAT compliance rules

The mechanics of the South African Value-Added Tax (VAT) system result in the VAT output payable by a supplier to be claimable as input by the recipient while the ultimate amount of VAT is borne by the final consumer.

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The mechanics of the South African Value-Added Tax (VAT) system result in the VAT output payable by a supplier to be claimable as input by the recipient while the ultimate amount of VAT is borne by the final consumer. This is on the basis that indirect tax, which the VAT Act levies on transactions, should be borne by the consumer and not by the supplier in the value chain.

Vendors are, therefore, in a neutral position from a VAT perspective, taking this output tax and input tax into account.

The South African Revenue Service (SARS) is under tremendous pressure to maintain its tax collections in the slowing economy and increasingly disregards this broader principle of the tax system and enforces the letter (as opposed to the spirit) of the law. SARS thereby collects tax from suppliers even in instances where there was no apparent loss to the fiscus.

Furthermore, when SARS assesses the supplier for such tax, it imposes 10% late payment penalties and interest typically for five years and imposes understatement penalties (USP) ranging between 0% and 150% (generally 25%) for all defaults in respect of VAT tax periods since 1 October 2012.

Given the criticism which SARS received last year for its failure to reach its collection targets, SARS can be expected to be even more vigorous in the short to medium term. This is especially troubling for short-term insurers.

Our VAT Act is largely based on the New Zeeland Goodsand Services Tax Act, which is one of the few VAT systems globally where short-term insurance and related services were included in the VAT net. As was the case in New Zealand, the short-term insurance industry sought clarity from SARS at the time in the form of a ruling, aimed to overcome industry specific difficulties due to the rigid provisions of the VAT Act. SARS provided the industry with a VAT specific ruling in 1991, effective 1 September 1991.

As things progressed, more difficulties and uncertainties arose resulting in many members applying for privater ulings.

During the first decade or so of the VAT system, SARS’ process of issuing rulings was uncoordinated and substantially different from these processes today. At the time, SARS officials at different offices issued rulings to any taxpayer who applied, leading to “ruling shopping” at different SARS branches to obtain better results.